Reporting Nonfinancial Assets: The Matching Concept Applied

a. The New Idea Company incurred a number of costs during 1999 in acquiring inventory, preparing it for sale, and contacting potential buyers. For each of the following, indicate whether the cost(s) should be recorded as a part of the total cost of inventory or immediately charged to expense.

b. An appropriate portion of the cost of a nonfinancial asset such as equipment or a building is matched against revenue in the periods in which the benefits are received. For each of the following, assume a company purchases equipment to produce products that will be sold in future periods:
1. What costs are capitalized as part of the cost of the equipment?
2. How will the cost of the equipment be matched to the benefits it provides in future periods? What portion of the cost should be reported as an expense each period?
3. When deciding how profitable the company has been in a single year, why is it important that the cost of using the equipment be considered?

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List price of inventory purchased $158,000 Trade discounts on inventory purchased (46,000) Shipping costs for inventory purchased 15,000 Advertising for the sale of inventory 25,000 Interest costs on money borrowed to buy inventory Costs to prepare the inventory for sale 8,000 5,000 Customs fees for inventory purchased overseas Travel costs to visit new inventory suppliers 2,000 15,000